A Delaware judge acting in a shareholder suit yesterday cut in half a $1.08 billion stock bonus package paid last year to three top officers of the nation's third-largest software maker, Computer Associates International Inc.
The decision, believed to be the largest of its kind, was a rare victory for a shareholder in the ongoing conflict in the corporate world over the sums paid to many company chiefs, whose compensation packages, based on stock awards, have grown significantly in the 1990s bull market.
Delaware Chancery Court Vice Chancellor Myron Steele said the three officials--Chief Executive Officer Charles Wang, Chief Operating Officer Sanjay Kumar and Executive Vice President Russell Artzt--would have to return roughly half a billion dollars in stock to the company, leaving them with about $320 million--"no mere bagatelle," as Steele put it.
Steele said the company's board of directors awarded the trio 9.5 million more shares than approved by stockholders.
The company and the officials, who had defended the bonus as proper under a stockholder-approved compensation plan, declined extensive comment yesterday, except to say that in their view, the ruling ran counter to "reasonable expectations" associated with the pay plan. They can appeal.
At issue in the case was the interpretation of the compensation plan, rather than any broader issues involving pay or the particular size of the bonus, which was highly publicized at the time for its size, large even by today's multimillion-dollar standards.
A broader controversy over the fundamental fairness of huge pay packages has simmered somewhat more quietly in and out of shareholder meetings and between labor and management for some time.
A study in August by two labor-oriented organizations, the Institute for Policy Studies and United for a Fair Economy, said the ratio of executive pay to worker pay had risen during the '80s and '90s from 42 to 1 to 419 to 1. It said the average annual compensation for chief executives of large companies was about $10.9 million, citing, in particular, well-publicized stock payouts of $575 million to Walt Disney Co.'s Michael Eisner, $167 million to Citigroup's Sanford Weill and $159 million to America Online Inc.'s Steve Case.
According to the lawsuit, which was filed in September 1998 on behalf of a private investor, the executives had originally been awarded 6 million shares in the 1995 stockholder-approved compensation plan, to be paid when the company's share price closed above $53.33 for the 60th day, a point it hit on May 21, 1998.
In the interim, however, there were three 3-for-2 stock splits, increasing the number of shares to roughly 20 million. That action was challenged as unauthorized.
Even as giant compensation packages for top executives have become common in this bull market, the Computer Associates deal was criticized by many investors and analysts as overly extravagant. "It was the most wild, the most excessive pay package I've ever seen," said executive-compensation expert Graef S. Crystal.
Computer Associates' stock price plunged when the company announced after the bonus was awarded that business in Asia was turning soft and that it would take a $1.1 billion charge to cover the payment. That amount wiped out much of the company's profit for the prior three years.
Martin Unger, a partner at Tenzer Greenblatt LLP who represented Lisa Sanders, the shareholder, called the judge's decision a victory for shareholders' rights.
"It tells corporate boards that they have to honor plans as they are written," he said. "They can't go off and frolic on their own."
Ann Yerger, director of research for the Council of Institutional Investors, a D.C.-based organization of large pension funds, agreed: "It's nice to see something that's returned. It doesn't happen often. It's very hard to show that there is a waste of assets."
Unger said several other investors have filed suits over what they believe is improper pay over the past few years. But most cases have been settled out of court and none involved the massive amounts of the Computer Associates dispute.
"When I saw the original lawsuit, I thought it was actually some kind of a joke," said David Moy, an analyst at Baltimore's Chapman Co. "This decision is kind of surprising."
Tom Scott, a managing director for A.T. Kearney Executive Search, said the high pay is a reflection of a shortage of talented and experienced technology leaders: "There are lots of ideas, lots of money out there, but not nearly enough people who have the skills to execute those ideas. So if I am an investor, I am happy to pay good people the market price." Indeed, under Wang's leadership, Computer Associates shares soared from around $5 a share in 1992 to $58.68 3/4 at the market's close yesterday.
Computer Associates, based in Islandia, N.Y., has about 1,000 employees in its Herndon and Reston offices. Like many other companies, it is chartered in Delaware.